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Employer > Trustee Zone > OPS Matters > Budget 2008 - Pensions Summary
Budget 2008 - Pensions Summary
March 12th was Alistair Darling’s first budget.
There were some interesting points affecting pensions and we’ve noted the key ones below. These proposals will be included in the Finance Bill 2008 which will become law in the summer as the Finance Act 2008. However, as they’re only proposals the situation could change before then.
The Lifetime Allowance and Annual Allowance were increased to £1.65m and £235K respectively from 6 April 2008 but we knew that was happening.
Inheriting tax-relieved pension savings
Mainly affecting products that offer a scheme pension, such as a defined benefit scheme, this proposal will prevent the use this type of pension arrangement as a way of passing on pension benefits after age 75 and avoiding Inheritance Tax.
| Current position | Proposed position |
| If a member is receiving a scheme pension, one of the options is to pay the pension out of scheme assets. When a member dies any remaining funds in respect of that member can be used for the benefit of other members of the scheme. This may result in an increase in pension for the remaining members of the scheme some of whom may be connected to the deceased member. | Existing anti-avoidance rules will be widened to: - impose unauthorised payment charges if a member who has rights to a scheme pension, a dependant’s scheme pension or a dependant’s annuity subsequently dies and a connected person becomes entitled to an increase in their pension rights under the scheme that is attributable to that death
- impose an Inheritance Tax charge if a member with a scheme pension, a dependant’s scheme pension or a dependant’s annuity, dies aged 75 or over and there is an increase in pension rights attributable to the death of a member or an unauthorised lump sum payment in respect of the deceased’s pension scheme arrangement.
This will not apply to schemes with 20 or more members where the increase in rights applies at the same rate to each of the members.
This will apply to any death on or after 6 April 2008. |
Triviality – occupational pension schemes only
| Current position | Proposed position |
| At present, small funds can be commuted on the grounds of triviality if the total value of all pension funds held by a member is less than 1% of the standard lifetime allowance. This must include the value of any pensions in payment. All benefits can be taken as a lump sum. This equates to £16,500 in 2008/09 and will rise to £18,000 in 2010/11. | New rules will allow a trivial lump sum if the value of benefits is below £2,000 and the member is part of an occupational scheme. Regulations will also define the circumstances in which 'stranded pots' of money under an occupational scheme can be trivially commuted. It would appear that a 'stranded pot', which is still to be defined, will represent small funds not large enough to buy an annuity, which are not otherwise commutable under the normal trivial commutation rules.
These payments can be made in addition to the normal 1% of standard lifetime allowance provision (ie £16,500 in 2008/09).
Effective date not yet known. |
Pre A-Day protection of tax-free cash
This will affect mainly members in occupational pension schemes (including section 32s) who have an entitlement to more than 25% Pension Commencement Lump Sum (PCLS) on their pre A-Day benefits. But it can also include individuals in personal pension or stakeholder schemes who have block transferred their benefits that originated in an occupational scheme with an entitlement to more than 25% PCLS.
| Current position | Proposed position |
| Members who don't opt for transitional protection (i.e. primary or enhanced protection) but who had the right to more than 25% of their benefits value at 5 April 2006 as PCLS can still have the higher percentage paid at vesting. The PCLS amount will be based on the amount of PCLS at 5 April 2006 increased in line with the lifetime allowance, up to their vesting date. Where a member has protected pre A-Day PCLS they can currently receive an additional tax-free cash sum provided 'relevant benefit accrual' has occurred. | The requirement to check whether 'relevant benefit accrual' has occurred has been removed.
This change could be particularly significant for members who have protected pre A-Day PCLS, which is held under a money purchase scheme to which no further contributions can be paid on or after A-Day (i.e. no 'relevant benefit accrual'). For example, there may be individuals with protected cash held under a section 32 arrangement, which does not permit the payment of further contributions. This change could enable the individual to obtain a higher tax-free cash sum from that scheme where the member´s chosen investment funds have performed well.
Before this change can be implemented product providers may need to update computer systems to allow this.
This change will be backdated to 6 April 2006. |
Unauthorised payments
| Current position | Proposed position |
| Generally, authorised payments are tax-free or taxable at the member’s marginal rate and usually tested against the lifetime allowance, but unauthorised payments are taxable at a rate of up to 70%. This is designed to ensure that all of the tax reliefs that have built up in the fund are reclaimed. | A number of situations have been identified where pension schemes make payments that are classed as unauthorised, but which were not intended to be caught as such under the post A-Day rules.
Legislation is being amended to allow the following to be authorised payments: - an overpayment of an ongoing pension
- a pension which continues to be paid after the member has died
- certain payments made after the member has died where payment should have started before death, but this wasn't possible
In addition the Finance Act will: - allow the regulations to have effect for payments already made provided they do not increase a person’s liability to tax
- describe how these payments must be treated for income tax purposes and who the tax charge should apply to, and
- ensure the payments can be tested against the lifetime allowance, if necessary.
The above changes will ensure these payments can be treated and be taxed as authorised payments.
This change will be backdated to 6 April 2006. |
Benefit crystallisation event (BCE) 3 - increasing a scheme pension
This will only affect products that offer a scheme pension such as a final salary scheme.
BCE 3 aims to prevent people avoiding the lifetime allowance charge by initially setting up a small pension which is later increased. This works by valuing the increases, as well as the initial pension, against the member’s available lifetime allowance to see if a charge applies.
| Current position | Proposed position |
| The payment of a scheme pension is tested under BCE 2 however BCE 3 is triggered when a scheme pension is increased beyond a permitted margin. In most circumstances, the permitted margin is the greater of 5% or RPI per year. A scheme can give an increase beyond the permitted margin without triggering BCE 3 if the scheme has 50 or more pensioner members and the increase applies to them all. | The exemption will be widened to cover an increase given to a group of at least 20 pensioner members at the same time and at the same rate, not necessarily to all pensioner members.
If the increase in pension is less than £250 per year a test is not required.
A provision for rounding has been introduced so that once the pension increase has been awarded it can be increased to the nearest whole number without the need for a further test. Schemes will also be allowed to use the figure for RPI for any month which is within 12 months before the increase in pension.
These changes will be backdated to have effect from 6 April 2006, except for the change to the RPI calculation date, which will apply from 6 April 2008 . |
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.
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